Health Savings Accounts (HSAs) offer individuals and families a tax-advantaged way to save for medical expenses while enjoying various tax benefits. However, it’s essential to understand the annual contribution limits set by the Internal Revenue Service (IRS) to maximize the advantages of an HSA and avoid potential tax penalties.
HSA Contribution Limits:
If you have an HSA-eligible high-deductible health plan (HDHP) with individual coverage, you can contribute up to $3,850 to your HSA in 2023.
For those with family coverage under an HSA-eligible HDHP, the maximum allowable contribution in 2023 is $7,750.
Individuals aged 55 and older can make catch-up contributions of up to $1,000 on top of the standard contribution limits. This means that if you are 55 or older and have individual coverage, your maximum contribution for 2023 is $4,850, and for family coverage, it’s $8,750.
HSA Eligibility and Plan Requirements
To contribute to an HSA, several eligibility criteria must be met, and your health plan must adhere to specific requirements:
Your HSA-eligible health plan must have an annual deductible of at least $1,500 for self-only coverage or $3,000 for family coverage.
The out-of-pocket maximum for your HDHP, including deductibles, copayments, and coinsurance, cannot exceed $7,500 for self-only coverage or $15,000 for family coverage.
Enrollment in Other Plans:
You cannot be simultaneously enrolled in any non-HSA-eligible health plan, including a full-purpose healthcare flexible spending account (FSA) or Medicare.
Not Claimed as a Dependent:
If someone else can claim you as a dependent on their tax return, you are not eligible to contribute to an HSA.
HSA Contribution Deadline
Contributions to an HSA can typically be made until the tax filing deadline for the year. For the tax year 2023, you have until April 15, 2024, to make HSA contributions for 2023.
Prorated Contributions for Partial-Year Coverage
If you are not enrolled in an HSA-eligible health plan for the entire year, your HSA contribution limit may be prorated.
To calculate your prorated contribution, determine the number of months you were enrolled in an HSA-eligible plan on the first day of each month, then divide that number by 12 and multiply it by the maximum contribution limit for your coverage type.
For example, if you have self-only coverage, started an HSA-eligible plan on February 1, 2023, and had coverage until the end of the year, your prorated contribution limit would be ($11/12) x $3,850 = $3,531.67.
Last-Month Rule and Testing Period
If you are enrolled in an HSA-eligible health plan as of December 1 of a given year, you can contribute the maximum amount allowed for the year, even if you were enrolled for only a short time.
However, you must stay enrolled in an HSA-eligible health plan for a one-year “testing period” from December 1 of the year you contribute until December 31 of the next year. If you fail to meet this requirement, you may owe income taxes and a 10% penalty on excess contributions.
HSA Tax Penalties
Contributions to HSAs offer tax advantages, but there are penalties for overcontributing or using HSA funds for ineligible expenses. Overcontributing can result in a 6% excise tax on the excess contributions, which also count as taxable income.
Using HSA funds for ineligible expenses can lead to a 20% penalty plus income tax if you are under 65; however, those 65 and older can use HSA funds for non-qualified expenses without the penalty.
In conclusion, understanding the HSA contribution limits for 2023 is essential for individuals and families looking to take advantage of these tax-advantaged accounts. By adhering to the contribution limits, eligibility criteria, and compliance rules, you can effectively save for future medical expenses while enjoying the tax benefits that HSAs offer.